When selling your business, it’s important that you value the information you have put together on the business and don’t just share it with anyone.

I would advise working with a broker or advisor who is sensitive about how they share your information and who actively uses a prequalification process in dealing with potential purchasers.

Step 1: Asking the hard questions

The first step of prequalification is determining: Is this person likely to have a chance of buying the business they’ve enquired about?

When an interested party enquires about a business with us, often the first thing we do is ask them about their intentions, their objectives, their financial capability. As business brokers we do this before we discuss the business they’ve enquired about.

It’s human nature not to like to ask hard questions:

• Why are you interested in my business?
• Do you have funds at hand to purchase a business?
• If you do, tell me how much and how those funds are available? Are they liquid? Are they sitting in an asset?

These are all very straight up and down questions and as a broker I have no trouble asking them. But there are countless examples of business owners we have come across who have been frustrated with sale processes, and it often gets back to the fact they felt those questions would embarrass the other party.

I would stress the importance of finding an advisor or broker who you are confident will ask those sorts of questions on your behalf, upfront.

Step 2: The confidentiality agreement

Often the next step is to have an interested party sign a confidentiality agreement.

Again, it’s only a document, a signature on a page, but it’s a further step of prequalification that the party is actually seriously interested in looking at the proposition.

You can’t weed out all tyre kickers and neither can your broker or advisor, but there is a standard professional process for sharing information.

I shudder at times when I hear of business owners who have shared detailed financial, business and customer information to a competitor, or a party that has approached them directly to buy their business, without any form of documentation or pre-qualification.

They think: ‘Great, someone is interested in my business. I’ll share some information with them and see how it goes. They might make an offer.’

No matter how desperate you are to sell, if you tease up that relationship without some proper protocols in place, the risk is you will go down a long and sometimes expensive exercise without clarity around whether they’re actually the right person to buy your business. Even worse, that party might just be fishing for market-sensitive information for commercial benefit and you’ve just assisted them.

Step 3: Initial due diligence

The next step is what I call the ‘initial due diligence period’ where a good broker will share sufficient information for potential purchasers to make an informed decision about either making a non-binding offer for the business, or the fact they’re not interested in the business.

This information usually involves the information memorandum (IM) and facilitating answers to IM-related questions.

As I often tell clients, it’s better to know if people are interested or not as early as possible. It’s where you get parties in between that wastes time and becomes frustrating.

You need to ensure you’re working with an advisor or broker who can ‘wrestle interested parties to the ground’, manage the information flow on your behalf in a professional way, and continually prequalify and qualify the level of interest, up to the point that it needs to be documented in a non-binding offer, or in fact a withdrawal on the basis that it’s not quite right. 

Keep an open mind regarding feedback

If an interested party does withdraw their interest, you need to get feedback from your broker on why they weren’t interested. Did they lose interest because of:

• the price;
• the risk around the business owner being heavily involved;
• the fact the market is turning sour;
• the regulatory environment, or
• their own personal circumstances, mostly unrelated to the business?

It’s vital that you, as a business owner, know why those target individuals aren’t wanting to take the bait in terms of progressing the sale. You can then respond by discussing the need for any revisions to your selling strategy in terms of asking price, IM, information provision, terms, and so on.

The answer may be ‘no’, ‘yes’, or ‘wait and see’, but the best policy is to keep an open mind regarding market feedback.

If you would like support to prequalify purchasers, or for any other business sale-related advice, contact the team at JPAbusiness on 02 6360 0360 for a confidential initial discussion.

James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.